Question

In your own terms and understanding, state briefly the objective of an audit of financial statements. In general terms, how do auditors meet that objectives?

As a follow up and related to the previous discussion, distinguish between management's and the auditor's responsibility for the financial statements being audited.

Answer 1

The Objective of an audit of financial statements is the obtain REASONABLE ASSURANCE that the financial statements are free of MATERIAL MISSTATEMENTS.

For Auditors to meet the objective of audit, It is importent that they understand the terms "Reasonable Assurance" & "Material Misstatements".

(A) Reasonable Assurance: It is a high level of assurance regarding the existance or absence of material misstatements in the financial statements which is achieved through obtaining SUFFICIENT & APPROPRIATE AUDIT EVIDENCE. The Auditor Obtains such evidences for each balance sheet item and as he/she obtains such evidences the AUDIT RISK can be reduced to an acceptable level.

(B) A Material Misstatement can be defined as information that is incorrect and can affect the economic decisions of users relying on the information and cause potential economic loss.

The Auditor uses various techniques to obtain Sufficient & Appropriate Audit Evidences like:

a) Verification of Documents & Records (giving more value to external evidences)

b) Audit Sampling

c) Physical Verification

d) Observation

e) Inquiry (With Internal Persons) & Confirmation (With External Persons)

f) Recalculations and Reperformance

g) Analytical Procedures

___________________________

The Management's responsibility for the financial statements is the Preparation of the financial Statements whereas the auditor is responsible for examining the management's financial statements and expressing an opinion whether the financials give a true and fair view of its position and performance and that no material misstatement exists.

The Management is also responsible in making appropriate disclosures that they deem fit in certain situations.

The auditor’s responsibility is performing the audit investigation and reporting the results in accordance with GAAP or any other reporting standard mandated.

The Auditor cannot necessarily detect intentional frauds as it can be due to wilful collusion and such irregularities may not be made available for detailed analysis and scrutiny. As such the auditors cannot be made responsible for such frauds.

We should ensure that fraud detection will be the management's responsibility and special mention of this should be made when preparing an audit report.